Shell to Strengthen Russian Hand Through Gazprom Asset Swap

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Royal Dutch Shell Plc will swap a stake in one of its international energy assets for part of Gazprom PJSC’s Sakhalin-3 project as Europe’s biggest oil company extends ties with Russia.

The companies are discussing which asset would be offered to Gazprom, Shell Chief Executive Officer Ben Van Beurden said last week in London. For Shell, the prize is greater involvement in the world’s biggest gas reserves.

“Russia sits on 25 percent of the world’s gas reserves and is very, very close to markets that we are very familiar with,” Van Beurden said July 30, on the sidelines of the company’s earnings presentation. Shell is also pushing “to see how we can work with Gazprom internationally.”

Shell, BP Plc and Total SA are seeking more access to Russia as the country’s low-cost output and proximity to Asian markets outweigh sanctions amid a slump in crude prices. While producers slash spending and mothball projects as oil slides, they need to add reserves to sustain future output. Russia has the fifth-biggest oil deposits and costs that are as much as two-thirds below the global average for Shell.

“There are less and less world class assets that can be operated at such a low price environment,” Simon Leathers, director of accounting firm BDO International U.K. Merger & Acquisitions, said in a July 31 phone interview. “That’s where Russia represents such as opportunity.”

Lower Costs

OAO Gazprom Neft, the oil-producing unit of Gazprom that operates primarily in Russia, last year produced a barrel of oil equivalent for $5.66. That compares with costs of $14.74 a barrel for Shell and $9.41 for BP, according to data compiled by Bloomberg.

Shell’s oil and gas production has dropped in 10 of the last 12 years. Russia accounted for about 5 percent of the producer’s 3.08 million-barrels-a-day output in 2014, according to its annual report.

The company said on July 30 that it’s preparing for a “prolonged downturn” in the oil market by cutting 6,500 jobs this year and reducing capital investment by $7 billion.

Shell and Russia’s gas-pipeline monopoly plan to swap assets in a deal that may happen in a year, Gazprom CEO Alexey Miller said June 26 in Moscow.

Officials at Gazprom’s press service couldn’t immediately comment the plan to swap assets with Shell.

The Hague-based Shell is also pushing to expand Russia’s only LNG plant linked to the Sakhalin-2 oil and gas project in the Far East of the country, Van Beurden said. Shell owns a 27.5 percent stake in export-oriented Sakhalin-2.

Russian Attraction

“We’ve been working with Gazprom for quite a few years to understand how we can take the project further,” Van Beurden said. Supplies from Sakhalin-2 make up about 9 percent of the gas needs of Japan, the world’s biggest LNG buyer, he said.

Gazprom, Shell, E.ON SE and OMV AG also agreed in June to build two gas pipelines under the Baltic Sea to Germany, with a annual capacity of 55 billion cubic meters a year.

Russia is attracting other big western oil companies even as U.S. and European sanctions limit certain types of investment. BP holds 20 percent of OAO Rosneft and in June, the British company agreed to invest in Rosneft’s Siberian fields. Total is raising funds for a Russian gas export project.

Exxon Mobil Corp. and Rosneft jointly bid for licenses in Mozambique, the Russian company said July 30.

One day later, the U.S. tightened sanctions against Russia, adding the son of a billionaire ally of President Vladimir Putin and a sovereign wealth fund in what it said was a fight against efforts to circumvent the restrictions. The U.S. and the European Union have existing sanctions following Russia’s annexation of Crimea.

The sanctions have put restrictions on exploration for shale, Arctic and deep-water oil. The sanctions do not bar companies from drilling in onshore fields or investing in gas-export projects.

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